perfect competition the state of an ideal market under the following conditions: (a) every consumer in the market is a perfectly rational maximizer of utility; (b) every producer is a perfect maximizer of profit; (c) there is a very large (ideally infinite) number of producers of the good in question, which ensures that no producer can set the price for its output (otherwise, an imperfect competitive state of oligopoly or monopoly obtains); and (d) every producer provides a product perfectly indistinguishable from that of other producers (if consumers could distinguish products to the point that there was no longer a very large number of producers for each distinguishable good, competition would again be imperfect). Under these conditions, the market price is equal to the marginal cost of producing the last unit. This in turn determines the market supply of the good, since each producer will gain by increasing production when price exceeds marginal cost and will generally cut losses by decreasing production when marginal cost exceeds price. Perfect competition is sometimes thought to have normative implications for political philosophy, since it results in Pareto optimality.
The concept of perfect competition becomes extremely complicated when a market’s evolution is considered. Producers who cannot equate marginal cost with the market price will have negative profit and must drop out of the market. If this happens very often, then the number of producers will no longer be large enough to sustain perfect competition, so new producers will need to enter the market.
See also PHILOSOPHY OF ECONOMICS , PRO- DUCTION THEOR. A.N.